Payback, NPV, and MIRR Your division is considering two investment projects, eac

Question

Payback, NPV, and MIRR

Your division is considering two investment projects, each of which requires an up-front expenditure of $23 million. You estimate that the cost of capital is 12% and that the investments will produce the following after-tax cash flows (in millions of dollars):

What is the regular payback period for each of the projects? Round your answers to two decimal places.

Project A years

Project B years

What is the discounted payback period for each of the projects? Round your answers to two decimal places.

Project A years

Project B years

If the two projects are independent and the cost of capital is 12%, which project or projects should the firm undertake?
-Select-Project AProject BBoth projectsItem 5

If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?
-Select-Project AProject BItem 6

If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?
-Select-Project AProject BItem 7

What is the crossover rate? Round your answer to two decimal places.
%

If the cost of capital is 12%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places.

Project A %

Project B %

Year Project A Project B 1 5 20 2 10 10 3 15 8 4 20 6

Explanation / Answer

The firm should undertake both the projects, as both have a postive NPV A= 12.84 B= 12.34

As the cost of captial is 5% which is less than the computed cost of capital of 12% , since the project are mutually exclusive Project A with higher NPV must be selected.

As per the above calculation at 15% discount rate project B has an NPV of 10.63 and Project A has lower NPV of 10.17 hence Project B must be selected.

cross over rate is a rate at which both the projects has almost similar NPV, from the above calculation the cross over rate is approx. 13.5%, the MIRR is project A is 3.71% and Project B is 5.48%.

Cummulative cashflow disc. Cash flow Cummulative Disc. cashflow Year Project A Project B Project A Project B Dis. Factor 12% Project A Project B Project A Project B 0 -23 -23 -23 -23 1 -23.00 -23.00 -23.00 -23.00 1 5 20 -18 -3 0.893 4.47 17.86 -18.54 -5.14 2 10 10 -8 7 0.797 7.97 7.97 -10.57 2.83 3 15 8 7 15 0.712 10.68 5.70 0.12 8.53 4 20 6 27 21 0.636 12.72 3.82 12.84 12.34 Regular payback period: When cashflows are uneven, the below formula has to be used: Payback period= A+(B/C) Where, A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A Payback (project A)= 2+(8/15) 2.53 years Payback (project B)= 1+(3/10) 1.30 years Discounted payback period: Payback (project A)= 2+(10.57/10.68) 2.99 years Payback (project B)= 1+(5.14/7.97) 1.64 years

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